Apartment Owners Beware

A recent decision of the High Court is a timely reminder to apartment owners that breaching contractual disclosure obligations in sale and purchase agreements can lead to serious legal consequences, including substantial damages.

Sole v Hutton[1] involved a claim by the purchasers of an apartment in the ocean-front Belle Mer apartments in Mount Maunganui for damages caused as a result of alleged weathertightness issues. The purchasers claimed the vendors were liable for breach of warranty and misrepresentation, arguing that they had to pay for repairs not only to the vendor’s particular unit, but also to their share of the common property and other losses, totalling $1.3 million.

The Court found that the vendor’s had breached specific disclosure obligations in the standard ADLS-REINZ sale agreement and misrepresented their knowledge of issues; particularly the balconies, cladding, roof and basement, as described in expert reports on the weathertightness of the apartments commissioned by the Body Corporate in 2014, some 4-5 years prior to the plaintiffs’ purchase in 2019.

Breach of warranty

The plaintiffs’ claims that the reports amounted to an outstanding “notice”, “demand”, “requisition” and/or “requirement” failed, as did their claim that the reports’ non-disclosure rendered the pre-contract disclosure under s 146 of the Unit Titles Act 2010 “incomplete” and “incorrect”.

However, they were successful in arguing the defendant-vendors had breached the warranty in clause 11.2(7) of the sale and purchase agreement. That clause warrants that vendors of unit title properties have no knowledge or notice of any fact which might give rise to or indicate the possibility of the purchaser incurring a liability under the Unit Titles Act. The warranty has been held by the Courts to place “a very heavy onus of disclosure on the vendor”[2] and to apply to liabilities relating to the common area (as opposed to solely individual unit property).[3]

While the vendors argued that they had carried out various work to the apartment, which, to their knowledge, did not leak, the Court rejected that as too narrow an approach. It held that it would be artificial to look at the apartment in isolation, as the apartments are all part of one building. And where the apartment building as a whole was leaky, all owners became liable to pay for the repairs, whether or not the particular owners’ apartment leaked.[4] As to knowledge, it was not sufficient to believe that an individual apartment was free from leaks, if the vendor was on notice of the possibility of a special levy being required to deal with major systemic weathertightness issues with the apartment complex as a whole.

That was the case here, where four years before the sale the vendors had received expert reports which outlined weathertightness concerns with the apartment complex and recommending further investigations and repairs be undertaken. No further reports were sought, and limited repairs were carried out. The vendors did not disclose the reports. Thus, Blanchard J found that the reports should have been disclosed, and the failure to do so represented a breach of the contractual warranty.

Misrepresentation

The plaintiffs made a further claim in misrepresentation for statements made by vendor’s agent. The plaintiffs had recently listed their own property with the same agency, so were aware of the type of disclosures the vendors would likely have made to the agents in the process of listing the property. The salesperson confirmed that these disclosures were made, which included a statement that to the best of their knowledge and belief the property was free from hidden or underlying defects.

The plaintiffs further enquired as to whether there were any known issues with the building, which they were assured there were not. Blanchard J held that these statements were plainly made to induce the plaintiffs to purchase the property.[5]

The defendants relied on the qualification of their knowledge and belief to limit their liability. While the Court agreed that the statement was qualified (as to the vendors’ knowledge, rather than being a representation of absolute fact – e.g. that the property was not a leaky building), the vendors could still be liable if they did know of defects and leaks, which they plainly did. For that reason, the misrepresentation claim was made out.

Betterment

Given the findings of breach of warranty and misrepresentation, the vendors were prima facie liable for the cost of repair and other losses actually incurred by the plaintiffs. The vendors argued such losses should be reduced for (inter alia) betterment.

“Betterment” is basically an improvement that adds to the value of a property. To award betterment would be to make a plaintiff better off than they would have been had there not been a breach of contract. The onus is on the defendant to prove that betterment has occurred (or will occur) and to prove the value and extent of the betterment.[6] This is sometimes a difficult assessment, since repair usually involves replacement of old for new.

The vendors contended that at the time the remedial work was carried out various aspects that were replaced had been near to the end of their serviceable life, and therefore their replacement resulted in significant betterment. The defendants’ expert in this case determined the life expectancy of each of the aspects that were repaired, and made a deduction for the percentage of life expectancy the item had already lasted for. He posited that this formula accurately represented the excess benefit the plaintiffs received from the repairs. The plaintiffs did not propose an alternative approach but cited the reduction of 5% for betterment in Gunton[7] and Southland Indoor Leisure Centre[8].

Blanchard J adopted neither approach. Rather, he confirmed that the purpose of the betterment exercise is to “calculate the amount by which the property, after the repair, is more valuable than beforehand.”[9] The Court was not satisfied that the approach taken by the vendor’s expert did this and indicated the “right way” to assess betterment was with expert valuation evidence “comparing the value of the property as it was before the repairs, but on the assumption that it did not leak, with the value as it is after the repairs”.[10]

In the absence of evidence of that sort, which left the judge in a difficult position of either having to find the vendors had failed to prove any betterment or taking an “impressionistic approach”, Blanchard J came to a reduction of 30% for betterment. Effectively, he halved the 60% put forward by the vendor’s expert, to take account of (a) the uncertain reliability of the vendors’ expert’s approach and (b) the disadvantage to the plaintiffs in having to make unscheduled and untimely expenditure.[11] (This reduction was partially off-set by the court’s award of over $50,000 for 2 ½ years alternative accommodation and $35,000 general damages for “stress and anxiety”).

Effect of decision

This judgment makes clear that clause 11.2(7) of the standard ADLS sale agreement is another very significant in-road into the “caveat emptor” or “buyer beware” principle, which continues to be the basic principle for sale of real estate in New Zealand. As to the persistence of caveat emptor, see Watson v Zhou [2024] NZCA 417 (warning of a too free undoing of contracts by the courts under the law of contractual mistake[12]). Vendors of unit title apartments should take special care when providing such onerous warranties and certainly ought not to run the risk of disclosures to agents being wrong.

The judgment also makes clear the approach to betterment, with valuation evidence rather than a quantity surveyor’s opinion of building elements’ life expectancy being preferred. It is worth noting that Blanchard J considered this type of evidence will likely temper the measure of betterment, and result in “less extreme” outcomes; perhaps another reason for apartment owners to exercise caution.

Our team of litigation specialists can help you pursue or respond to claims concerning sales of leaky homes and apartments.

Our thanks to Emily McLean, solicitor and Stuart Dalzell, partner for contributing this Insight.

[1] Sole v Hutton [2025] NZHC 430.

[2] Moxon v Cassidy HC Auckland CIV 2006-4040-5380, 27 August 2007 At [46]; Sole v Hutton, at [59].

[3] Miles v Gadd [2022] NZCA 227 at [38]-[40]; Sole v Hutton, at [60].

[4] Sole v Hutton, at [62].

[5] Sole v Hutton, at [86].

[6] Sole v Hutton, at [115] and [117].

[7] Gunton v Aviation Classic Ltd [2004] 3 NZLR 836.

[8] Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2015] NZHC 1983.

[9] Sole v Hutton, at [128].

[10] Sole v Hutton, at [129].

[11] Sole v Hutton, at [131].

[12] See Contract and Commercial Law Act 2017.

By Partner Stuart Dalzell and Solicitor Emily McLean